Argentina: Economy in Crisis

Argentina is
in desperate economic straits with President Macri being forced to ask for
accelerated disbursement of the IMF standby loan and to announce emergency
measures as the peso goes into free fall. Recession looms and Macri’s hopes of
a second Presidential term in late 2019 seem likely to be dashed. But Brazil is
managing to lift itself out of its worst recession for some time; so perhaps
Argentina can too?

April 2018
saw the beginning of the massive loss in investor confidence in Argentina’s
future, causing President Macri to approach the IMF for a $50 billion standby
arrangement (approved on 20 June). This allowed him to draw down an immediate
$15 billion but instead of calming fears, the peso continued to slide to the
point where, in early September, Economics Minister, Nicolas Dujovne, was
despatched to Washington to ask for an accelerated disbursement plan for the
remainder of the funds. IMF Director, Christine Lagarde, is likely to be
sympathetic (though at the time of writing no agreement has been announced).

The
statistics speak for themselves. The Argentine peso has fallen in value from 16
pesos to the US dollar in 2017 to a record low of 39 pesos to the US$ at the
end of August, including drops of 7% on 29 August and 13% on 30 August. This
makes the Argentine peso the worst performing currency of the world’s emerging
markets in 2018 against the US$, ahead of the Turkish lira, Brazil’s real and the
South African rand. Inflation in Argentina has soared from 24% in December 2017
to nearly 32% at the end of August. Foreign currency reserves, which had been
rising under Macri, have dropped from $55 billion in February 2018 to $36
billion by end-June. The Central Bank raised interest rates three times in
April and May to reach 40% and has since raised the rate to 45% and at the end
of August to 60%, squeezing domestic businesses wanting to borrow. Foreign
debt, once under 40% of GDP, now stands at 75% of GDP (with some pundits
suggesting that this could reach 90% of GDP by the end of the year). The budget
shortfall stood at 5.1% of GDP at the end of July. Economic activity, which had
increased to nearly 5% in November 2017, has slumped to a negative rate of
-2.7%. Unemployment has risen to 9% of
the working population and more than 28% of Argentina’s 44.5 million
inhabitants are assessed by the IMF to live below the poverty line. The
situation is serious. Standard & Poor’s lowered its credit rating for
Argentina from ‘stable’ to ‘negative’.

The IMF had
set fairly strict targets for its $50 billion standby loan, primarily to
control GoA’s fiscal deficit and to curb inflation. Macri promised to balance
the federal budget by 2020 and to continue his austerity measures, including
further cuts to energy subsidies, lowering the public sector wage bill and
suspending promised tax cuts. In July, he announced a freeze to public sector
recruitment until the end of 2019 and delayed key infrastructure projects,
particularly a German $2.2bn hydro-electric dam project and two nuclear powered
reactors to be built by China.

On 3 September,
Macri announced a temporary restoration of taxation on agricultural grain
exports (corn, wheat, soy beans) at 4 pesos per US$ in value and 3 pesos per
US$ in value for processed products. This is a major u-turn: he had abolished
export taxes as one of his first acts on his election as a mark of his
business-oriented economic policies. Macri acknowledged that this was a ‘a bad
tax’ but said that he needed the help of the farmers. He also announced his
intention to abolish 12 of Argentina’s 22 Government departments as well as
reducing the number of Government Ministers in an attempt to reduce spending on
the government payroll. He stressed that the ‘gradualist approach’ that he had
adopted at the start of his administration was not working; it needed to be
‘faster’.

The social
implications of Macri’s austerity measures, no matter how ‘gradualist’ he might
term them, have been pretty severe. Argentinians have been faced with major
increases in utility bills, up by over 1,000% in electricity and water costs.
They have seen the closure of many shops including the flagship chain stores of
Walmart (US) and Falabella (Chile). The construction sector has been hit with
the prospect of significant job losses with the abolition of major
infrastructure projects. Official GoA figures record the loss of 76,359 jobs in
the public and private sectors between November 2016 and June 2018. It is
becoming increasingly hard for some Argentine families to afford their usual
living essentials. Not surprisingly, there have been mass demonstrations and
union agitation. The IMF remains deeply unpopular with memories of the 2001/2
crisis still high in people’s memories. Yet Macri has so far rejected the idea
of increasing direct taxation – most OECD countries collect an average of 8.7%
of GDP in direct taxation; Argentina only 3.2% - if only to shore up his
declining popularity base.

Argentina
holds Presidential elections on 27 October 2019. Macri was hoping to achieve a
second term of office; if successful, he would be the first non-Peronist
President to do so. But his prospects are declining, as his popularity rating
slips below 40%. Even so, his ratings are still higher than those of Cristina
de Kirchner, who remains mired in corruption scandals. So far, there is no
obvious candidate to take up the leadership of the Peronist movement to mount
an effective challenge against him; Peronism remains divided. Macri has the
support of the international community and may still achieve success – but it
looks increasingly unlikely.